Once upon a time, the courts of this country were hostile to arbitration agreements -- clauses in contracts where the parties elect to settle disputes by binding arbitration instead of the court system. Congress, in the early 20th century, passed the Federal Arbitration Act in order to permit companies to choose, in contracts with other companies, to engage in arbitration without the courts refusing to enforce the results of said arbitrations. However, the courts took Congress’ action on its face to stand for a Federal policy favoring arbitration over the courts in all cases. Then, companies dealing with consumers -- especially activist consumers -- discovered the Arbitration Act. Credit card, bank, software licensing and other adhesive (pre-printed, take-it-or-leave-it) contracts that, unlike agreements between large companies, are not negotiable, began to show up with stifling arbitration clauses. Carefully reviewing these clauses yields some disturbing findings. For example, these clauses:

(i) Require consumers to give up their Constitutionally protected right to a trial by jury in a court of law for any matter over $20. See the Seventh Amendment: "In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury shall be otherwise re–examined in any Court of the United States, than according to the rules of the common law;" and

(ii) Often require consumers to arbitrate or defend arbitration in the corporation’s home state, even if it is grossly inconvenient; and

(iii) In all states except Illinois and California, you give up the right to bring any sort of a class action, either in court or in arbitration.

The courts have taken this to an extreme. For example, settled law holds that you have no right to appeal the decision of an arbitrator to any court, no matter how wrong it is. An arbitrator could rule that it is perfectly OK for a credit card user agreement to award a 2000% penalty APR if a payment is one day late, even if the payment was mailed by the due date, and even though the law prohibits such interest rates, saying that the contract controls. Under the settled law, a judge is powerless to redress such an outrageous thing. In arbitration, legal errors are irreversible unless the arbitration agreement expressly permits appeal. Many if not most, however, explicitly prohibit appeals.

The Illinois Supreme Court recently held that class actions cannot be banned, but the actions must be heard by the arbitrator. This was over a case where Cingular Wireless (now AT&T Mobility) was defending large early-termination fees from consumers who switched cellular carriers, and consumer attorneys were arguing that the fees constituted illegal penalty clauses in the contracts.

There is substantial and credible evidence that the arbitrators favor the corporations, who choose which arbitration organization to place into their agreements, over consumers. Considering that arbitration fees are substantially higher than court filing fees, the arbitrators have a strong incentive to rule favorably for the party that brings home its bacon. This is not mere speculation. One arbitration company, National Arbitration Forum, stopped hearing consumer arbitration cases in July 2009, after legal actions questioning its neutrality, and alleging, apparently with strong evidence, an economic relationship with one law firm that directed tens of thousands of arbitration actions to it. Arbitration fees are far greater than filing fees in the courts, discouraging consumers from using arbitration, and attorneys from filing actions where arbitration clauses exist. There is no precedent to determine what actions are meritorious or frivolous. Arbitrators are not required to follow precedents set by the courts. Arbitrators can limit discovery (the process by which plaintiffs and defendants gather evidence) without accountability to the courts.

Therefore, if you have a claim against a company that caused you $500 in losses, but it costs $750 to file the case, and you have to fly from West Virginia to California to make the argument, and filing each motion costs $250 to file (they’re normally free in the court system), and in-person hearings cost you $750 per day, and you have no availability of a class action, and the pre-printed agreement says that you cannot recover attorney’s fees if you win and the company can recover attorney’s fees if you lose, no sane attorney will take your case The costs will outstrip any recovery (assuming a truly neutral arbitrator) tenfold. The company has crafted a contract that permits it to get away with unlawful conduct unscathed.

Now it is true that there are some consumer laws out there that permit consumers to reap a windfall from simple mistakes. The courts, however, tend to wrap these laws with a rule of reason. Precedent unfolds and the companies are protected from frivolous lawsuits by that precedent. It is also true that a flood of consumers suing and demanding jury trials all over the country could cause a company huge losses. However, in cases like that, the Federal courts set up multi-district litigation or class actions and the companies are protected from litigating the same case 10,000 times. Further, unless the company is doing something illegal, the company should be safe. If someone comes up with a loony theory of recovery, a court will normally smack it down, and will be affirmed on appeal. That sets strong precedent to protect companies from frivolous lawsuits.

Now Come the Democrats. They get one right. In 2009 they introduced HR 1020, The Arbitration Fairness Act of 2009. Consumer contracts with arbitration agreements would no longer be enforceable as to those arbitration agreements. In the Senate, the bill is known as S.1782. The Democrats support this bill, which would outlaw arbitration clauses in consumer, employment and real estate contracts. The GOP, in this case wrongly, opposes this bill as pandering to trial lawyers. If the Democrats introduced this bill for that reason, it does not matter. Who cares; the effect of the legislation is good for the people.

Conservativity supports this bill. Good conservatives should support this bill. While it is true that the government has no right to dictate to people and businesses how to conduct their business, the government has a fundamental task, namely to prevent people from being swindled. These arbitration clauses have the effect of allowing companies to get away with swindling consumers by forcing them to "litigate" in inconvenient and apparently non-neutral fora and raising the cost of redressing the grievance way beyond the actual loss itself. The only reason a company would impose such terms is to effectively avoid accounting for unlawful acts in a court of law.

Forcing a consumer to "take arbitration on our terms or leave" in a preprinted agreement is, to use a legal term, substantively unconscionable. This is doubly so if, for example, a credit card issuer adds arbitration language to a preprinted card agreement years after the card is obtained. Now the consumer is given Hobson’s choice: Accept an onerous arbitration clause, or close the long-standing account, reduce the average age of your credit accounts, and do harm to one’s credit score. Don’t you think that credit card issuers know this and intend to force arbitration upon their customers by leveraging this implicit blackmail?

Remember that the courts exist not only as a creature of the Seventh Amendment, but also as the primary means under the First Amendment, to petition the government for the redress of grievances. The Democrats, in this one case, have brought legislation that restores to the people a fundamental right taken away by wily corporate attorneys.

I urge you to write your representatives today to support immediate passage of HR 1020 and S 1782, and to Mr. Obama to sign the bill if and when it hits his desk.